What We’re Reading (Week Ending 07 November 2021) - 07 Nov 2021
Reading helps us learn about the world and it is a really important aspect of investing. The legendary Charlie Munger even goes so far as to say that “I don’t think you can get to be a really good investor over a broad range without doing a massive amount of reading.” We (the co-founders of Compounder Fund) read widely across a range of topics, including investing, business, technology, and the world in general. We want to regularly share the best articles we’ve come across recently. Here they are (for the week ending 07 November 2021):
1. DAOs: Absorbing the Internet – Mario Gabriele
As late as 1820, just 20% of the American population worked for an organization that paid wages. The rest farmed, fished, ran their own businesses, or split their time between these activities.
Over the following 130 years, that changed rapidly. Industrialization offered the chance for greater wealth while demanding increased labor. That drove the consolidation of workers beneath large organizations with centralized command systems. These shifts meant that by 1950, as much as 90% of the populace depended on companies for wages.
The company, then, is a modern phenomenon, at least in the way we usually think of it. What seems so embedded and intractable today — the default for most new ventures — is really just humanity’s latest attempt to solve the problem of coordination.
A better alternative may have emerged. Though far from perfect, decentralized autonomous organizations (DAOs) seek to remedy some of the company’s flaws while enabling human collaboration at scale. This internet and crypto-native structure looks to decentralize governance and ownership, giving contributors the chance to determine a project’s direction and profit from its success.
While still in its fledgling stages, the explosion of interest in this organizational framework indicates that DAOs are an idea to be taken seriously. Over the last few months, in particular, new DAOs have risen to prominence, attracting meaningful capital and high-caliber, devoted talent. Historically, those that have paid attention to such dislocations in the crypto realm have looked prescient years later — even when the hype seemed overblown. Both builders and investors would be wise to give the space due consideration..
..But still, it is worth spending a moment thinking through this most direct of questions: what is a DAO?
Even after learning about DAO lore, it’s a deceptively tricky query to answer. Or at least, to answer well.
To start, we can return to words from which the acronym is derived: a “decentralized autonomous organization.”
What does that mean?
Well, if true to their name, DAOs should be free of a centralized authority (decentralized), operate independent of governments or private sector actors (autonomous), and be, well, organizations.
Simple enough, right?
Not quite. The matter becomes rather hazy when you realize that very few entities we call “DAOs” today actually fit this definition. True decentralization is rare, especially to begin with since most projects need a degree of centralization to get up and running. The same can be said of autonomy.
Critically, these traits shouldn’t be viewed as binary. Answering whether a DAO is decentralized or not is not a “yes” or “no” question but a matter of degree. Decentralization and autonomy are sliding scales, and “DAOs ”position themselves differently on this spectrum.
Since a literal reading doesn’t get us very far, we need other ways to think about DAOs. The slippery part here is that the act of elaboration raises its own questions. Indeed, every person to define a DAO is likely to give you a subtly or meaningfully different response. For example, one gameful interlocutor might reasonably classify a DAO as a group chat with a shared bank account, a second might categorize it as a community with distributed ownership, and a (dreamy) third might simply call it a “vibe.”
All would be right, in their own way. DAOs are group chats, and communities, and many of them separate themselves through their culture or vibe. But though capacious, something about these depictions sells the idea short.
DAOs are — or can be — a lot more than just a Discord channel with a native token. Rather, they are entities geared towards a shared purpose: the creation of value. That is the common denominator across our stated articulations.
Of course, how value creation is defined varies. Some focus on building tangible digital products, whereas others look to accumulate and compound social capital. Still, this fundamental purpose abides.
This is the most basic description of a DAO, and it is unsatisfying. Could we not say that almost any organization is minded towards the creation of value? Don’t companies seek the same end? What about nations and religions?
“Value” is too subjective to give us sufficient clarity. To get a higher fidelity understanding of DAOs we need to go beyond nomenclature, and look at the characteristics that distinguish this form of entity from others.
2. 9 Investing Lessons From “Breaking the Rules With David Gardner” Podcast – Sudhan Purushothuman
David Gardner first touched on how he picks stocks.
He has six traits he looks out for in a rule-breaking company and they are listed below with Gardner’s explanations.
“So the first attribute is probably the most important one, being a top dog and a first mover in an important emerging industry. So I love to find the companies that are the leaders, if you’re not the lead Husky, the view never changes. And so we’re always asking, who’s the leader? But not anywhere, not in big oil today or telecom, I love important emerging industries. That’s where most of the great stocks come from, the ones that make you money for 20-plus years.”…
…“Number two, we’re looking for a sustainable competitive advantage that takes many different forms. Examples would be, we’ve got Jeff Bezos, you’re down. So the founders, the human capital and companies. Certainly within the world of biotechnology, there’s patent protection for 20 years for your successful new drug, that’s an example of a competitive advantage. And others’ competitive advantages, if everybody else is inept and you’re not smartest guy in the room, kind of a thing.”…
…“Because truly, a sustainable competitive advantage means so much more to me than an attractive looking price to sales ratio. It’s so much deeper, it’s harder to earn, and it’s so much less ephemeral. It will stand the test of time in a time where people are memeing stocks up and down like silly, and it’s all so short term, and it’s not really going to create sustainable wealth for people playing short-term games.”…
…“Because the whole framework hangs together, if you just isolate one of those factors, like that last one you mentioned, it doesn’t work every time. There are things that are crazy over valued and that you wouldn’t want to buy, but when you’re seeing the full integration of the model and you’re saying, “Yes, yes, yes, yes, yes,” in those first five, and everybody’s saying it’s overvalued, that really does work.”
3. Eliud Kipchoge: Inside the camp, and the mind, of the greatest marathon runner of all time – Cathal Dennehy
Two stories you need to know about Eliud Kipchoge, each painting a picture of a man who is, well, different.
The first is from Vienna, October 12, 2019. Earlier that day, Kipchoge had become the first man ever to run a sub-two-hour marathon, clocking 1:59:40, a time that didn’t count as an official world record due to the use of rotating pacemakers and Kipchoge being handed his drinks from a bike (rather than picking them off a table).
The INEOS 1:59 Challenge, bankrolled by British billionaire Jim Ratcliffe, gathered many of the world’s best to help pace Kipchoge to a mark many had deemed impossible. But then he did it, holding an absurd pace of 4:33 per mile or 2:50 per kilometre before sprinting, exulted, into the arms of his wife, Grace, and his coach, Patrick Sang, for an achievement that would echo in eternity.
Later that night, organisers held a no-expense-spared party for those who’d been part of the project.
Kipchoge was there, handing out trophies to the 41 men who’d paced him, and he then made a speech to thank those who’d worked so hard behind the scenes. Alcohol flowed through the room in torrents, and most athletes present ended up out on the town until late night turned to early morning.
Kipchoge? He didn’t touch a drop of alcohol (he never drinks) and once his speech was made, the man responsible for the entire celebration quietly exited the room, going back to his hotel for an early night.
He has a thing about celebrating, Kipchoge. Sees it as something sinister, something dangerous, a self-indulgent act that might derail his mindset, make him think, somewhere in his subconscious, that he has arrived, the inference being he has nowhere left to go.
He’ll punch the air at the finish, alright, but try to get him into an open-top car or to attend a huge welcome-home party and you’ll get a polite but firm rejection…
…Another story, this one from the Tokyo Olympics. On Sunday, August 8, the last day of the Games, Kipchoge once again eviscerated the world’s best marathoners to retain his Olympic title, dropping an almighty hammer 19 miles into the race and coming home a whopping 80 seconds clear of his closest rival.
The race was held in Sapporo, more than 800km from Tokyo, but tradition dictates that the men’s marathon medals are handed out at the Olympic closing ceremony. Kipchoge and his fellow medallists, along with their coaches, were flown to Tokyo that afternoon, then made to wait for a few hours at the airport before being driven to the stadium.
Cramped in a dull room with hours to kill, the Olympic medallists did what most would do: they opened their phones, logged into wifi, and started scrolling through the river of goodwill messages.
All except one. Kipchoge placed his phone in front of him and never touched it, sitting there — for hours — in contented silence.
4. Let the Market Worry For You – Michael Batnick
Let me tell you about the time when my brain was poisoned. It was October 2012 and I was at my first financial conference…
…I spent my time during the GFC as a waiter at an upscale restaurant. Business was dead. The last 6 months of my tenure were spent playing arcade games while patrons mostly stayed home. I entered the real world with a crappy resume and the lousiest economy in 40 years. I spent 2 years cold calling people who didn’t know me to sell products they didn’t want. I spent the next two years unemployed and figuring out what I was going to do with my life. I got more rejections than I can remember. Over the years, even living at home, I drained the bank account that I had built up during my earlier working years.
So when I walked into that conference room, I was ready, willing, and able to be convinced that bad times were here to stay.
The economic recovery was the weakest one we’ve ever experienced coming off such a severe contraction. The stock market, however, more than doubled from the lows. So it sure seemed reasonable to ask, and even suggest, that the market had gotten ahead of itself.
And that’s just what happened.* One of the chief strategists on the stage was talking about the dark ages or some shit. I can’t remember the exact details. But one thing he said did stick with me. “My job is to worry about the downside. The upside will take care of itself.” I thought that was the most profound thing I ever heard. Looking back, I had it all wrong…
…Worrying is normal. Life is full of disappointments so we tend to protect ourselves from emotional harm. Expect the worst and bathe in the dopamine when it doesn’t come to pass.
Investors have to constantly fight to stay positive. Actually, let me rephrase that. You don’t have to be positive or negative, you can be both. You can worry about the short term and be optimistic about the long term. That’s how I tend to behave. When I say you have to constantly fight, what I’m talking about is the never-ending negativity. You can’t give in!
5. Bill Miller 3Q 2021 Market Letter – Bill Miller
Over the past decade or so my letters have been focused mostly on saying the same thing: we are in a bull market that began in March of 2009 and continues, accompanied by the typical and inevitable pullbacks and corrections. Its end will come either when stocks get too expensive relative to bonds or when earnings decline, neither of which is the case now. There have been a few other themes: since no one has privileged access to the future, forecasting the market is a waste of time. It is more useful to try and understand what is happening now and give up trying to predict what is going to happen. In the post-war period the US stock market has gone up in around 70% of the years because the US economy grows most of the time. Odds much less favorable than that have made casino owners very rich, yet most investors try to guess the 30% of the time stocks decline, or even worse spend time trying to surf, to no avail, the quarterly up and down waves in the market. Most of the returns in stocks are concentrated in sharp bursts beginning in periods of great pessimism or fear, as we saw most recently in the 2020 pandemic decline. We believe time, not timing, is key to building wealth in the stock market.
When I am asked what I worry about in the market, the answer usually is “nothing”, because everyone else in the market seems to spend an inordinate amount of time worrying, and so all of the relevant worries seem to be covered. My worries won’t have any impact except to detract from something much more useful, which is trying to make good long-term investment decisions.
6. ‘I Lost Everything’: How Squid Game Token Collapsed – Connor Sephton
With Squid Game rapidly becoming Netflix’s most popular series ever, it was inevitable that altcoins inspired by the hit TV show would follow.
SQUID launched last Tuesday with a price of just $0.01 — and promised to offer access to an online play-to-earn game inspired by the brutal survivor drama.
The token’s value rose dramatically, and just 72 hours later, it was worth $4.42 — an increase of 44,100%. By then, it had already attracted coverage from some of the world’s biggest media outlets, including the BBC and CNBC.
But even then, there were signs that something was amiss. CoinMarketCap had received multiple reports of users struggling to sell SQUID on the decentralized exchange PancakeSwap.
A token that’s surging in value has little use when its owners are unable to sell it.
Unfortunately, many of the articles published about SQUID failed to make it clear this token is not officially affiliated with Netflix — giving it a sheen of respectability that may have lulled investors into a false sense of security.
Headlines discussing its surging value will have contributed to a fear of missing out — spurring crypto investors to get their hands on the token in the hope of astronomical gains.
Then Nov. 1 happened.
Prices stood at $38 as of 6am London time on Monday morning — accelerating to $90 by 7am, $181 by 8am, and $523 by 9am.
Just 35 minutes later — at 9.35am — SQUID appeared to hit highs of $2,861.80. A surge of 7,500% in three-and-a-half hours is unheard of… even in the notoriously volatile world of cryptocurrencies.
SQUID owners have told CoinMarketCap how they had little choice but to watch helplessly as the token’s value rose. An anti-dumping mechanism that was imposed by the project’s developers meant they could not sell.
Five minutes after this supposed all-time high, at 9.40am, SQUID had cratered to $0.0007926 — a fall of 99.9999%.
Curiously, trading volumes throughout the rollercoaster ride had remained steady at about $11 million, indicating SQUID’s surge wasn’t matched by a rise in investor activity.
This is a classic sign of a rug pull, where developers abruptly abandon a project — taking their investors’ funds with them.
7. The Same Stories, Again and Again – Morgan Housel
Anthropologist Franz Boas says, “Every culture has its own genius and should be judged in its own terms.”
Sure, but every culture and era also share universal characteristics that repeat again and again. The same attitudes, the same flaws, the same stories that show up all over the place. They’re reflections of how people’s heads work no matter where they live or when they were born.
Those common behaviors are what I find the most interesting from history because they’re not just trivia – you can be nearly assured that they’ll eventually impact your own life.
Social sciences get a bad rap because so many insights are hard or impossible to reproduce. I think the only solution is paying special attention to the few behaviors that have repeated themselves throughout history.
A few that stick out from economics:..
…3. Innovation is hard to predict and easy to underestimate because so much occurs by accident, when several boring discoveries compound into something extraordinary.
A common story through history is that past innovation was magnificent, but future innovation must be limited because we’ve picked all the low-hanging fruit.
On January 12th, 1908, the Washington Post ran a full-page spread called “America’s Thinking Men Forecast the Wonders of the Future.”
Among the “thinking men” buried in the fine print was Thomas Edison.
Edison had already changed the world at this point, becoming the Steve Jobs of his time.
The Post editors asked: “Is the age of invention passing?”
Edison’s answer was predictable:
“Passing?” he repeated, in apparent astonishment that such a question should be asked.
“Why, it hasn’t started yet. That ought to answer your question. Do you want anything else?”
“You believe, then, that the next 50 years will see as great a mechanical and scientific development as the past half century?” the Post asked Edison.
“Greater. Much greater,” he replied.
“Along what lines do you expect this development?” they asked him.
“Along all lines.”
This wasn’t just blind optimism. Edison was successful because he understood the process of scientific discovery. Big innovations don’t come at once, but rather are built up slowly when several small innovations are combined over time. Edison wasn’t a grand planner. He was a prolific tinkerer, combining parts in ways he didn’t quite understand, confident that little discoveries along the way would be combined and leveraged into more meaningful inventions.
Edison, for example, did not invent the first lightbulb; he just greatly improved upon what others had already built. In 1802 – three-quarters of a century before Edison’s lightbulb – a British inventor named Humphry Davy created an electric light called an arc lamp, using charcoal rods as a filament. It worked like Edison’s lightbulb, but it was impractically bright – you’d nearly go blind looking at it – and could only stay lit for a few moments before burning out, so it was rarely used. Edison’s contribution was moderating the bulb’s brightness and longevity. That was an enormous breakthrough. But it was built on the back of dozens of previous breakthroughs, none of which seemed meaningful in their own right.
That was why Edison was so optimistic about innovation.
He explained:
“You can never tell what apparently small discovery will lead to. Somebody discovers something and immediately a host of experimenters and inventors are playing all the variations upon it.
He gave some examples:
Take Faraday’s experiments with copper disks. Looked like a scientific plaything, didn’t it? Well, it eventually gave us the trolly car. Or take Crooke’s tubes; looked like an academic discovery, but we got the X-ray from it. A whole host of experimenters are at work today; what great things their discoveries will lead to, no one can foretell.
“You’re asking if the age of invention is over?” Edison asked. “Why, we don’t know anything yet.”
This, of course, is exactly what happened.
When the airplane came into practical use in the early 1900s, one of the first tasks was trying to foresee what benefits would come from it. A few obvious ones were mail delivery and sky racing.
No one predicted nuclear power plants. But they wouldn’t have been possible without the plane. Without the plane we wouldn’t have had the aerial bomb. Without the aerial bomb we wouldn’t have had the nuclear bomb. And without the nuclear bomb we wouldn’t have discovered the peaceful use of nuclear power.
Same thing today. Google Maps, TurboTax, and Instagram wouldn’t be possible without ARPANET, a 1960s Department of Defense project linking computers to manage Cold War secrets that became the foundation for the Internet. That’s how you go from the threat of nuclear war to filing your taxes from your couch – a link that was unthinkable 50 years ago, but there it is. Facebook began as a way for college students to share pictures of their drunk weekends and within a decade was the most powerful lever in global politics. Again, it’s just hard to connect those dots with foresight. And that’s why all innovation is hard to predict and easy to underestimate. The path from A to Z can be so complex and end up at such a strange point that it’s nearly impossible to look at today’s tools and extrapolate what they might become.
Disclaimer: None of the information or analysis presented is intended to form the basis for any offer or recommendation. Of all the companies mentioned, we currently have a vested interest in Alphabet (parent of Google Maps), Meta Platforms (parent of Instagram), Netflix, and Twilio. Holdings are subject to change at any time.
